Emissions Charge and Asymmetric Information: Consistently a Problem?

This study calls into question the established view that lack of information on clean-up cost functions represents a serious problem in designing an optimal charge on polluting waste discharged byNpoint sources. In the standard case of “adverse-selection,” a firm is shown to have an unbounded incentive to under-report marginal clean-up costs. However this result should be revised if the firm is required to behave “consistently” with its own reports. In the latter case, not only is the incentive to under-report marginal clean-up costs no longer unbounded, but it also becomes possible to identify the conditions in which such an incentive approaches zero.